ISLAMIC FINANCE Banking On Allah Devout Muslims don't pay or receive interest. So how can their financial system work? FORTUNE Monday, June 10, 2002 By Jerry Useem http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=208088 There's nothing in Osman Abdullah's bearing to suggest an Islamic fundamentalist. He's a businessman, sober in dress and political outlook. Ask him about America, and he'll talk fondly of his time at the University of Wisconsin, where he earned his MBA. But when it comes to his banking habits--and the Koran's ban on giving or receiving interest--Abdullah turns deadly serious. "Allah gave us very clear instructions: Don't make money on money," he says. The words from Chapter 2, Verse 278 of the Koran are, in fact, quite specific: "O you who believe! Have fear of Allah and give up what remains of what is due to you of usury.... If you do not, then take notice of war from Allah and His Messenger." "If I break that," says Abdullah, "I'm dead sure that I'm going to get very bad results in the hereafter. I believe it as I believe in talking to you now." We are talking, just now, outside Shamil Bank in the tiny Persian Gulf state of Bahrain. It's the bank where Abdullah keeps his money, and, except for the tellers' untrimmed beards and the section for ladies' banking, it looks much like any other: customers standing in line, an ATM machine, a hum of efficiency. But Shamil is not like any other bank. For starters, Abdullah's savings account isn't really a savings account at all, but something called a mudarabah account: Instead of earning fixed interest, his savings are invested directly in a range of ventures, such as construction projects and real estate. "In Islam, money has to work," Abdullah explains. "If it works, we have to share the profits. If it doesn't, you don't owe me anything else." That means his nest egg could shrink if enough of those ventures fail. But, he says, "I'm willing to take the risks." So, it turns out, are an increasing number of Muslims. At a time when the words "Islam" and "finance" are more likely to conjure the association "terrorist money laundering," the Muslim world has quietly embarked on a very different sort of jihad: building a financial system where interest--a phenomenon as old as money itself--does not exist. Spread across the Middle East and beyond are more than 200 Islamic financial institutions: banks, mutual funds, mortgage companies, insurance companies--in short, an entire parallel economy in which Allah, not Alan Greenspan, has the final say. Industry growth has averaged 10% to 15% a year. Sniffing opportunity, conventional banks like Citibank and HSBC have opened Islamic "windows" in the Gulf. And while the industry's market share is still modest--about 10% in Bahrain--its very existence challenges the modern assumption that global capitalism flattens all before it. Which leaves just one question: How on earth can it work? This spring, Shamil Bank helped Abdullah buy a car through a transaction known as murabaha, which is more distinct from mudarabah in function than in spelling. In a deal you'll never see from GMAC, Abdullah identified the Toyota Corolla he wanted, then asked the bank to buy it from the dealer for roughly 3,600 dinar (about $9,500). At the same time he agreed to buy the car from Shamil for 4,000 dinar, to be paid in monthly installments over three years. The two sales were executed almost simultaneously, but because Shamil Bank took possession of the car for a brief period of time, everything was kosher. Or rather, hilal. The result looked a lot like interest, and some argue that murabaha is simply a thinly veiled version of it; the markup Shamil charges is very close to the prevailing interest rate. But bank officials argue that God is in the details. For example, any late fees Shamil collects must be donated to charity, and the bank cannot penalize a borrower who is genuinely broke. Mortgages, meanwhile, are out of the question for Abdullah. That's why a house he's building in his native Sudan sits unfinished near the Nile River. "I started it four years ago," he says. "Sometimes I stop the construction until I collect enough money." Given the inconveniences, you might ask: What's the point? Can earning a little interest really be such a big deal? Bahrain's most eminent Islamic scholar provided some answers. I found Shaykh Nizam Yaquby at the back of his family's store in Bahrain's humming market--a diminutive, robed figure partly obscured by the piles of papers and books on his desk. They include both the hadiths, or sayings of the Prophet, and Inside Secrets to Venture Capital, which more or less capture Yaquby's eclectic background. He is trained in both economics (at McGill University in Canada) and in Islamic sharia law (in Saudi Arabia, India, and Morocco). During its heyday many centuries ago, sharia was the world's most vibrant body of commercial law, its contracts recognized from the Arabian peninsula to the Iberian peninsula. Then it fell into a long decline, which Yaquby and other Islamic scholars are doing their best to reverse. |